SEC Filing - Shell Midstream Partners LP

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-36710

Shell Midstream Partners, L.P.

(Exact name of registrant as specified in its charter)


Delaware						46-5223743
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

150 N. Dairy Ashford, Houston, Texas 77079

(Address of principal executive offices) (Zip Code)

(832) 337-2034

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Units, Representing Limited Partner Interests	SHLX	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer ý						Accelerated filer ¨
Non-accelerated filer ¨						Smaller reporting company ☐
						Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

The registrant had 233,289,537 common units outstanding as of November 1, 2019.

SHELL MIDSTREAM PARTNERS, L.P.

TABLE OF CONTENTS


			Page
Part I. Financial Information			3

Item 1. Financial Statements (Unaudited)			3

Unaudited Consolidated Balance Sheets			3
Unaudited Consolidated Statements of Income			4
Unaudited Consolidated Statements of Comprehensive Income			5
Unaudited Consolidated Statements of Cash Flows			6
Unaudited Consolidated Statements of Changes in (Deficit) Equity			7
Notes to Unaudited Consolidated Financial Statements			9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29

Item 3. Quantitative and Qualitative Disclosures About Market Risk			51

Item 4. Controls and Procedures			51

Part II. Other Information			53

Item 1. Legal Proceedings			53

Item 1A. Risk Factors			53

Item 5. Other Information			54

Item 6. Exhibits			55

Signature			56

* SHELL and the SHELL Pecten are registered trademarks of Shell Trademark Management, B.V. used under license.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

SHELL MIDSTREAM PARTNERS, L.P.

UNAUDITED CONSOLIDATED BALANCE SHEETS


	September 30, 2019		December 31, 2018

	(in millions of dollars)
ASSETS
Current assets
Cash and cash equivalents	$	294	$	208
Accounts receivable – third parties, net	12		19
Accounts receivable – related parties	30		29
Allowance oil	13		13
Prepaid expenses	2		15
Total current assets	351		284
Equity method investments	926		823
Property, plant and equipment, net	733		742
Operating lease right-of-use assets	5		—
Other investments	2		62
Other assets – related parties	2		3
Total assets	$	2,019	$	1,914
LIABILITIES
Current liabilities
Accounts payable – third parties	$	3	$	4
Accounts payable – related parties	10		9
Deferred revenue – third parties	—		8
Deferred revenue – related party	—		3
Accrued liabilities – third parties	22		13
Accrued liabilities – related parties	19		16
Total current liabilities	54		53
Noncurrent liabilities
Debt payable – related party	2,691		2,091
Operating lease liabilities	4		—
Finance lease liabilities	25		25
Other unearned income	2		2
Total noncurrent liabilities	2,722		2,118
Total liabilities	2,776		2,171
Commitments and Contingencies (Note 14)
(DEFICIT) EQUITY
Common unitholders – public (123,832,233 units issued and outstanding as of both September 30, 2019 and December 31, 2018)	3,461		3,459
Common unitholder – SPLC (109,457,304 and 99,979,548 units issued and outstanding as of September 30, 2019 and December 31, 2018)	(196)		(198)
General partner – SPLC (4,761,012 and 4,567,588 units issued and outstanding as of September 30, 2019 and December 31, 2018)	(4,042)		(3,543)
Accumulated other comprehensive loss	(6)		—
Total partners’ deficit	(783)		(282)
Noncontrolling interests	26		25

Total deficit	(757)		(257)
Total liabilities and deficit	$	2,019	$	1,914

The accompanying notes are an integral part of the consolidated financial statements.

SHELL MIDSTREAM PARTNERS, L.P.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018

	(in millions of dollars, except per unit data)
Revenue
Transportation, terminaling and storage services – third parties	$	33	$	58	$	109	$	150
Transportation, terminaling and storage services – related parties	68		66		196		164
Product revenue – third parties	—		1		4		2
Product revenue – related parties	10		14		26		24
Lease revenue – related parties	14		14		42		42
Total revenue	125		153		377		382
Costs and expenses
Operations and maintenance – third parties	19		21		48		89
Operations and maintenance – related parties	14		13		44		39
Cost of product sold – third parties	—		1		3		2
Cost of product sold – related parties	10		13		23		21
Loss from revision of asset retirement obligation	—		—		2		—
General and administrative – third parties	2		1		8		5
General and administrative – related parties	14		12		37		39
Depreciation, amortization and accretion	12		11		36		34
Property and other taxes	5		3		14		13
Total costs and expenses	76		75		215		242
Operating income	49		78		162		140
Income from equity method investments	115		73		265		161
Dividend income from other investments	—		15		14		53
Other income	8		8		28		24
Investment, dividend and other income	123		96		307		238
Interest expense, net	26		19		67		43
Income before income taxes	146		155		402		335
Income tax expense	—		—		—		—
Net income	146		155		402		335
Less: Net income attributable to noncontrolling interests	5		6		14		11
Net income attributable to the Partnership	$	141	$	149	$	388	$	324
General partner’s interest in net income attributable to the Partnership	$	36	$	37	$	93	$	96
Limited Partners’ interest in net income attributable to the Partnership	$	105	$	112	$	295	$	228


Net income per Limited Partner Unit - Basic and Diluted:
Common	$	0.45	$	0.50	$	1.30	$	1.04

Distributions per Limited Partner Unit	$	0.4450	$	0.3820	$	1.2900	$	1.0950

Weighted average Limited Partner Units outstanding - Basic and Diluted:
Common units – public	123.8		123.8		123.8		120.6
Common units – SPLC	109.5		100.0		104.1		98.5

The accompanying notes are an integral part of the consolidated financial statements.

SHELL MIDSTREAM PARTNERS, L.P.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018

	(in millions of dollars)
Net income	$	146	$	155	$	402	$	335
Other comprehensive loss, net of tax:
Remeasurements of pension and other postretirement benefits related to equity method investments, net of tax	—		—		—		—
Comprehensive income	$	146	$	155	$	402	$	335
Less comprehensive income attributable to:
Noncontrolling interests	5		6		14		11
Comprehensive income attributable to the Partnership	$	141	$	149	$	388	$	324

The accompanying notes are an integral part of the consolidated financial statements.

SHELL MIDSTREAM PARTNERS, L.P.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,
	2019		2018

	(in millions of dollars)
Cash flows from operating activities
Net income	$	402	$	335
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, amortization and accretion	36		34
Loss from revision of asset retirement obligation	2		—
Allowance oil reduction to net realizable value	1		—
Non-cash interest expense	1		—
Undistributed equity earnings	(5)		(2)
Changes in operating assets and liabilities
Accounts receivable	4		(13)
Allowance oil	(1)		(3)
Prepaid expenses and other assets	14		10
Accounts payable	—		(5)
Deferred revenue and other unearned income	(11)		(4)
Accrued liabilities	15		16
Net cash provided by operating activities	458		368
Cash flows from investing activities
Capital expenditures	(31)		(38)
Acquisitions from Parent	(90)		(482)
Contributions to investment	(13)		(21)
Return of investment	56		41
Net cash used in investing activities	(78)		(500)
Cash flows from financing activities
Net proceeds from equity offerings	—		973
Borrowings under credit facilities	600		1,820
Repayments of credit facilities	—		(1,573)
Contributions from general partner	—		20
Capital distributions to general partner	(510)		(739)
Distributions to noncontrolling interests	(13)		(11)
Distributions to unitholders and general partner	(379)		(302)

Other contributions from Parent	9		7
Credit facility issuance costs	—		(1)
Repayment of finance leases	(1)		—
Net cash (used in) provided by financing activities	(294)		194
Net increase in cash and cash equivalents	86		62
Cash and cash equivalents at beginning of the period	208		138
Cash and cash equivalents at end of the period	$	294	$	200
Supplemental cash flow information
Non-cash investing and financing transactions:
Change in accrued capital expenditures	$	(2)	$	1
Other non-cash contributions from Parent	—		2

The accompanying notes are an integral part of the consolidated financial statements.

SHELL MIDSTREAM PARTNERS, L.P.

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN (DEFICIT) EQUITY


	Partnership
(in millions of dollars)	Common Unitholders Public		Common Unitholder SPLC		General Partner SPLC		Accumulated Other Comprehensive Loss		Noncontrolling Interests		Total
Balance as of December 31, 2018	$	3,459	$	(198)	$	(3,543)	$	—	$	25	$	(257)
Impact of change in accounting policy (Note 4)	(4)		(5)		—		—		—		(9)
Net income	58		47		27		—		5		137
Other contributions from Parent	—		—		7		—		—		7
Distributions to unitholders and general partner	(49)		(40)		(40)		—		—		(129)
Distributions to noncontrolling interests	—		—		—		—		(3)		(3)
Balance as of March 31, 2019	$	3,464	$	(196)	$	(3,549)	$	—	$	27	$	(254)
Net income	45		40		30		—		4		119
Other contributions from Parent	—		—		9		(6)		—		3
Distributions to unitholders and general partner	(51)		(42)		(26)		—		—		(119)
Distributions to noncontrolling interests	—		—		—		—		(6)		(6)
June 2019 Acquisition	—		—		(510)		—		—		(510)
Balance as of June 30, 2019	$	3,458	$	(198)	$	(4,046)	$	(6)	$	25	$	(767)
Net income	56		49		36		—		5		146
Other distributions to Parent	—		—		(1)		—		—		(1)
Distributions to unitholders and general partner	(53)		(47)		(31)		—		—		(131)
Distributions to noncontrolling interests	—		—		—		—		(4)		(4)
Balance as of September 30, 2019	$	3,461	$	(196)	$	(4,042)	$	(6)	$	26	$	(757)


	Partnership
(in millions of dollars)	Common Unitholders Public		Common Unitholder SPLC		General Partner SPLC		Noncontrolling Interests		Total
Balance as of December 31, 2017	$	2,774	$	(507)	$	(2,856)	$	23	$	(566)
Impact of change in accounting policy	(1)		1		(2)		—		(2)
Net income	21		16		27		1		65
Net proceeds from equity offerings	673		300		—		—		973
Contributions from general partner	—		—		20		—		20
Other contributions from Parent	—		—		5		—		5
Distributions to unitholders and general partner	(33)		(30)		(20)		—		(83)
Distributions to noncontrolling interests	—		—		—		(2)		(2)
Balance as of March 31, 2018	$	3,434	$	(220)	$	(2,826)	$	22	$	410
Net income	43		36		32		4		115
Other contributions from Parent	—		—		2		—		2
Distributions to unitholders and general partner	(43)		(35)		(28)		—		(106)
Distributions to noncontrolling interests	—		—		—		(4)		(4)
May 2018 Acquisition	—		—		(738)		—		(738)
Balance as of June 30, 2018	$	3,434	$	(219)	$	(3,558)	$	22	$	(321)
Net income	62		50		37		6		155
Other contributions from Parent	—		—		2		—		2
Distributions to unitholders and general partner	(45)		(36)		(32)		—		(113)
Distributions to noncontrolling interests	—		—		—		(5)		(5)
Balance as of September 30, 2018	$	3,451	$	(205)	$	(3,551)	$	23	$	(282)

The accompanying notes are an integral part of the consolidated financial statements.

SHELL MIDSTREAM PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Except as noted within the context of each note disclosure, the dollar amounts presented in the tabular data within these note disclosures are stated in millions of dollars.

1. Description of Business and Basis of Presentation

Shell Midstream Partners, L.P. (“we,” “us,” “our” or “the Partnership”) is a Delaware limited partnership formed by Royal Dutch Shell plc on March 19, 2014 to own and operate pipeline and other midstream assets, including certain assets acquired from Shell Pipeline Company LP (“SPLC”) and its affiliates. We conduct our operations either through our wholly owned subsidiary Shell Midstream Operating LLC (“Operating Company”) or through direct ownership. Our general partner is Shell Midstream Partners GP LLC (“general partner” or “sponsor”). References to “RDS”, “Shell” or “Parent” refer collectively to Royal Dutch Shell plc and its controlled affiliates, other than us, our subsidiaries and our general partner.

Description of Business

We are a growth-oriented master limited partnership that owns, operates, develops and acquires pipelines and other midstream assets. As of September 30, 2019, our assets include interests in entities that own crude oil and refined products pipelines and terminals that serve as key infrastructure to (i) transport onshore and offshore crude oil production to Gulf Coast and Midwest refining markets and (ii) deliver refined products from those markets to major demand centers. Our assets also include interests in entities that own natural gas and refinery gas pipelines that transport offshore natural gas to market hubs and deliver refinery gas from refineries and plants to chemical sites along the Gulf Coast.

We generate revenue from the transportation, terminaling and storage of crude oil and refined products through our pipelines and storage tanks, and generate income from our equity and other investments. Our operations consist of one reportable segment.

The following table reflects our ownership interests as of September 30, 2019:


			SHLX Ownership